We’ve posited that since last year when the stock market crashed and the Fed announced Operation Twist the risk-on/risk-off trade that many cited as driving price action had actually inverted. By this we mean that the speculative community was long the risk-off bond market and short the risk-on stock market. As stock prices embarked on their historic rally from the Oct 2011 lows while the bond market was positioned for the Fed to continue to push rates lower this trade became increasingly at risk. We noted that the launch of the PIMCO TRF ETF with a 5YR duration at record low 5YR yields was indicative of a topping event and even asked on 2/29 when it was launched citing “Intense Pressure in this Market” whether “Who is more worried if stocks break out higher $ES_F shorts or $FV_F longs?”
Clearly this week the inverted trade is unwinding as stocks could not break the 1340/1345 support level last week and rallied to new highs while in the bond market yesterday’s FOMC meeting made no mention of further QE that so many speculators had been positioned for.
So what next? The equity short position is probably close to playing out though we may need one last spike thru 1400 to capitulate however the bond long is another matter. While stocks are closer to ending a decade long bear market if not already, bonds are ending a bull market that has lasted 3 decades and they are still very rich on the most basic metrics of growth and inflation.
We’d much rather focus on buying dips in stocks than bonds and will look to add at lower levels upon a reconciliation of the blow off by the shorts. Bonds should be avoided until much higher yields are in place.
it’s quite ironic that over the past 6 months speculators have been shorting stocks that may have put in a major bottom and buying bonds that may have put in a major top. The low in yields is when the Fed announced Operation Twist on 9/21 and the low in stocks was a few days later on 10/4.